New York's Highest State Court Finds that a Two-Year Suit Limitation Period Is Unreasonable and Unenforceable in Cases Where the Insured Property Cannot Reasonably Be Replaced in Two Years

We'll start with this statement from the second paragraph of this decision:

[W]e hold that such a [two-year] contractual limitation period, applied to a case in which the property cannot reasonably be replaced in two years, is unreasonable and unenforceable.

Read that again and let it sink in. Answering a certified question from the United States Court of Appeals for the Second Circuit, the New York Court of Appeals has essentially eliminated the two-year contractual suit limitations condition found in most New York property insurance policies in cases where insured property, damaged or destroyed by a covered peril, "cannot reasonably be replaced in two years[.]"

Executive Plaza LLC owned a commercial building in Long Island that was severely damaged by a fire in February 2007. The building was insured for $1 million, and the insurer, Peerless Insurance Company, made a $757,812.50 actual cash value payment to the insured. Rather than replacing the insured building by buying another one elsewhere, the insured chose to rebuild the building on the same site, but ran into zoning problems due to various changes it had proposed for the new building. Those zoning problems allegedly caused the insured not to be able to complete the reconstruction of the insured building until October 2010, more than two and a half years after the loss.

The policy under which the plaintiff's building was insured contained the following replacement cost condition:

We will not pay on a replacement cost basis for any loss or damage:

(i) Until the lost or damaged property is actually repaired or replaced; and(ii) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.

The policy also contained a "Legal Action Against Us" suit limitations condition that provided:

No one may bring a legal action against us under this insurance unless:

a. There has been full compliance with all terms of this insurance; andb. The action is brought within 2 years after the date on which the direct physical loss or damage occurred.

Just prior to the February 2009 two-year anniversary of the fire loss but before it had completed the insured building's reconstruction, the insured commenced an action against Peerless. That action was removed to federal court and dismissed on motion based on Peerless' argument that the insured had not yet expended more than the ACV payment in repairs or replacement of the building. The insured eventually completed the building's reconstruction in October 2010 and sued again for the replacement cost holdback of approximately $250,000.

Peerless again moved to dismiss the action based on the policy's two-year suit limitations period. In granting that motion, the United States District Court held:

[T]he Court finds that the Policy unambiguously bars any and all suits commenced more than two years after the date of the damage or loss. Since Plaintiff commenced this action well beyond the limitations period prescribed in the Policy, Plaintiff's action is time-barred.

Plaintiff appealed that decision to the United States Court of Appeals for the Second Circuit and that court, rather than deciding that appeal, certified the following question to the New York Court of Appeals:

If a fire insurance policy contains

(1) a provision allowing reimbursement of replacement costs only after the property was replaced and requiring the property to be replaced "as soon as reasonably possible after the loss"; and

(2) a provision requiring an insured to bring suit within two years after the loss;

is an insured covered for replacement costs if the insured property cannot reasonably be replaced within two years?

The New York Court of Appeals has now answered that question in the affirmative, adding that it would consider any suit limitations condition that bars a suit for replacement cost coverage benefits for property that cannot be reasonably replaced within two years to be unreasonable and unenforceable:

"[A]n agreement which modifies the Statute of Limitations by specifying a shorter, but reasonable, period within which to commence an action is enforceable" (John J. Kassner & Co. v City of New York, 46 NY2d 544, 551 [1979]; emphasis added). We conclude that the contractual period at issue here — two years from the date of "direct physical loss or damage" (i.e., from the date of the fire) — is not reasonable if, as the Second Circuit's question requires us to assume, the property cannot reasonably be replaced within two years.

It is true, as the District Court pointed out, that there is nothing inherently unreasonable about a two-year period of limitation. In fact, we have enforced contractual limitation periods of one year (Blitman Constr. Corp. v Insurance. Co. of N. Am., 66 NY2d 820 [1985]; Sapinkopf v Cunard S.S. Co., Ltd., 254 NY 111, 114 [1930]) and six months (Continental Leather Co. v Liverpool, Brazil & Riv. Plate Steam Nav. Co., 259 NY 621 [1932]; Aron & Co. v Panama R.R. Co., 255 NY 513, 519 [1931]; see also John J. Kassner, 46 NY2d at 552). The problem with the limitation period in this case is not its duration, but its accrual date. It is neither fair nor reasonable to require a suit within two years from the date of the loss, while imposing a condition precedent to the suit — in this case, completion of replacement of the property — that cannot be met within that two-year period. A "limitation period" that expires before suit can be brought is not really a limitation period at all, but simply a nullification of the claim. It is true that nothing required defendant to insure plaintiff for replacement cost in excess of actual cash value, but having chosen to do so defendant may not insist on a "limitation period" that renders the coverage valueless when the repairs are time-consuming.

We have found no case in which we have squarely held that an otherwise reasonable limitation period may be rendered unreasonable by an inappropriate accrual date. We think, however, that the law was correctly stated in Judge Crane's dissenting opinion in Continental Leather Co.: "[T]he period of time within which an action must be brought . . . should be fair and reasonable, in view of the circumstances of each particular case . . . . The circumstances, not the time, must be the determining factor" (259 NY at 622-623). While that rule was stated in a dissent, the majority, in affirming without opinion, apparently disagreed not with the principle but with its application to the case. The Appellate Division opinion that we affirmed in Continental Leather stated essentially the same rule in saying that the issue was whether the plaintiff had "a reasonable opportunity to commence its action within the period of limitation" (Continental Leather Co. v Liverpool, Brazil & Riv. Plate Steam Nav. Co., Ltd., 234 App Div 386, 387 [2d Dept 1932]).

Blitman also supports our holding here. In that case, we enforced an agreed-upon twelve-month limitation period, rejecting the insured's argument that it was "commercially unreasonable" under the circumstances (66 NY2d at 823). But in doing so, we pointed out that the policy enabled the insured to "protect itself by . . . beginning an action before expiration of the limitation period" (id.). Here, the insured did begin an action on the last day of the limitation period — and the insurer successfully argued that that action was brought too soon. It is unreasonable for it now to say, as it in substance does, that a day later would have been too late.

Some legal commentators has opined that this decision has limited precedential value or impact. I disagree. Insureds and their public adjusters will now argue in both building and contents loss claims that where the insured property "cannot reasonably be replaced" within two years the insurer must consider payment beyond the loss's two-year anniversary. First-party property coverage suits brought after that two-year anniversary will no longer be subject to automatic dismissal based on a clear violation of the policy's two-year suit limitations condition. Insureds undoubtedly will argue that they could not reasonably repair or replace the insured property within that two-year period and, therefore, should not be subject to the policy's two-year suit limitation. Property insurers that previously had been able to take down reserves on open claims for replacement costs holdbacks will no longer be able to do so confidently in all claim situations. Insurers that seek to avoid the impact of this decision by making it clear that damaged or destroyed property must be repaired or replaced within that two-tear period may face legal challenges and court nullification of such redrafted conditions based on the Court of Appeals' expressed view that such a condition would be unreasonable and unenforceable.

Of course, who's to say when it is that insured property "cannot reasonably be replaced" within two years after its damage or destruction? What test or standard will be utilized to assess whether the reasons given for such delay are reasonable? And does the court's use of the adverb "reasonably" mean that all disputes over a more than two-year delay in repair or replacement will involve one or more questions of fact, not amenable to summary disposition on motion? We shall see.

Welcome to Coverage Counsel, where we hope you will find timely and useful information regarding New York state and federal insurance coverage cases and issues.

Coverage Counsel is brought to you by the law firm of MURA & STORM, PLLC with a main office in Buffalo, New York. To contact us, call (716) 855-2800 or email Roy Mura, the editor of this blawg.

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